The private benefits of control in Chinese listed firms: Do cash flow rights always reduce controlling shareholders’ tunneling?

This study measures the size of private benefits of control (PBC) and explores the impact of ownership structure and board independence on controlling shareholders’ tunneling. Using data of Chinese listed companies between 2003 and 2006, we find that the average size of PBC, as measured by the price premium of block share transactions, is approximately 10.66% in Chinese listed companies. Also, firms with more independent directors on the board and firms with multiple large shareholders have a smaller size of PBC. Therefore, they experience a lower level of expropriation of minority investors by controlling shareholders. We particularly find evidence of a nonlinear U-shaped relationship between controlling shareholders’ PBC and their cash flow rights. On the left half of the nonlinear U-shaped curve, consistent with the interest-alignment effect of increased ownership concentration, increased cash flow rights appear to be effective in reducing controlling shareholders’ tunneling. However, on the right half, increased cash flow rights would exacerbate controlling shareholders’ expropriation of minority investors, which is the entrenchment effect of increased ownership concentration.